California insured’s duty to cooperate and insurer’s right to select defense counsel

In Travelers Property Casualty Co. v. Centex Homes, No. C 10-02757 (N.D. Cal. April 1, 2011), general contractor Centex was sued by homeowners for construction defects.  Centex tendered its defense to Travelers as an additional insured under policies issued by Travelers to two Centex subcontractors.    Travelers agreed to defend Centex under a reservation of rights and selected defense counsel to defend Centex.   Centex refused to accept the defense, asserting that it was  entitled to select defense counsel.  Travelers filed suit against Centex seeking a declaratory judgment that Centex had breached the duty to cooperate condition in the Travelers’ policy.  The federal district trial court granted Travelers’ motion for summary judgment, declaring that, under California law, Centex’ refusal to accept the defense offered by Travelers constituted a failure to cooperate which substantially prejudiced Travelers thereby excusing Travelers from any obligation to defend and indemnify Centex.   The court rejected Centex’ argument that there existed a conflict of interest entitling it to select defense counsel.  Specifically, although Travelers insured multiple parties in the underlying action, Centex and several subcontractors against whom Centex had filed cross-claims, because Travelers had the same interest in defending all against the homeowner claims, any conflict of interest was theoretical.  Additonally, Travelers’ reserving of its right to deny coverage for property damage occuring outside the Travelers’ policy periods  did not give rise to a conflict of interest primarily because the timing of the property damage was a factual issue outside of defense counsel’s control.